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By Jeff Dyer, professor of strategy at BYU and Nathan Furr, professor of entrepreneurship at BYU.

The examples and conclusions from The Innovator’s Method are drawn primarily from a sample of companies that were either among the world’s leaders in innovation premium or generated a significant improvement in their innovation premium (IP) (for more information go to learn.theinnovatorsmethod.com). A company’s innovation premium is the proportion of a company’s market value that cannot be accounted for from the net present value of cash flows of its current products or services in its current markets. Put another way, it’s the premium the stock market gives a company because investors expect it to launch new offerings, utilize existing resources more efficiently, or enter new markets that will generate even bigger income streams in the future. We developed this metric in concert with HOLT (Credit Suisse) and first introduced it in The Innovator’s DNA where we used it to create a ranking of the world’s most innovative companies. Since 2011 we have collaborated with Forbes and used the methodology to create the Forbes list of the world's most innovative companies.

To develop the primary study sample, we started with the 582 public companies that had at least $10 billion in market value and thus were eligible for the Forbes list of most innovative companies. After eliminating 56 firms for lack of complete data, we then looked at the 526 remaining firms to see if any had improved their innovation premium by more than twenty “innovation premium percentage points” between 2006 and 2013. The change didn’t need to start in 2006 but could have started anywhere between 2006 and 2010. We labeled these companies “Big Improvers” because they made a significant jump in innovation premium, for example going from 0% innovation premium to 20% innovation premium; 10% to 30%, or from 20% to 40%. In other words, most of these firms more than doubled their innovation premium or achieved at least a 50 percent improvement over where they were before. Some of these firms were already solid performers that became sterling performers, such as Regeneron (IP increased from 23% to 65%), Hindustan Unilever and Unilever Indonesia (IP increased from 43% to 65%), Marriott (IP increased from 25% to 52%), and ARM (IP increased from 39% to 66%). Others were poor performers who improved to become average performers, like AT&T (IP increased from -22% to 2%). We also looked at firms over the same time period that we labeled “Moderate Improvers” that simply increased their innovation premium by at least 10 “innovation premium percentage points;” so the improvement was less than it was for the “Big Improvers.” These included firms like Intuit (IP increased from 20% to 30%) and Cemex (3% to 17%). We then repeated this process with the 1488 firms with market capitalization between $2-10 billion that are on our Forbes list of “most innovative growth companies.” This allowed us to identify additional firms that had significantly improved their innovation premium, such as Godrej & Boyce (IP increased from 40% to 60%) and Perrigo Pharmaceuticals (IP increased from 5% to 42%).

In addition to identifying a set of firms that had significantly improved their innovation premiums, we identified a set of innovation premium stars that exceeded 40 percent IP for at least 10 years since founding. These were firms like Salesforce.com, Amazon.com, and Google. We felt that these firms warranted further study to understand what they were doing differently to maintain such consistently high innovation premiums.

After identifying these two samples of innovation premium stars and innovation premium improvers, we selected a subsample of these firms for more detailed study. We selected the sample partly based upon interest (some firms had unusual IP performance changes) and convenience/access (some were closer in physical proximity or we had contacts into the companies that allowed us to get access). Although there was no intentional bias in the selection process, since the selection process was not completely random, we cannot rule out the possibility of some type of selection bias. As we studied these firms we applied Eisenhardt’s (1989) multi-case methodology to identify common themes and practices across firms. This methodology is useful for both generating theory and providing preliminary empirical support for theory. We found some common themes and discovered that successful innovators, whether stars or improvers, followed a similar process that we call the Innovator’s Method.

The common themes we found were that most had adopted some type of “idea management system” to capture insights that could be turned into innovations. We also discovered that most of the companies had developed deep expertise in principles like those described by design thinking principles (e.g., techniques used to deeply understand customer needs), lean start-up principles (e.g., techniques to rapidly experiment and test prototype solutions to those customer needs), or both. They also applied those same experimentation principles to test different elements of their business model to take their solution to market. Thus, most of the successful improvers had adopted new practices that fell within the following four steps or phases of The Innovator’s Method (for more detail about the four steps, go to learn.theinnovatorsmethod.com). The leaders of companies that we interviewed claimed that these practices had made a difference to their firm’s ability to innovate. Furthermore, we complemented this primary study with two separate studies: a longitudinal, qualitative case-study of the processes used by entrepreneurial firms to discover new opportunities and a quantitative study of the processes by which entrepreneurial firms change in the pursuit of new opportunities. Lastly, wherever possible, we integrated the latest research in strategy, innovation, and entrepreneurship into our study.

We are currently in the process of codifying the set of practices that typically fall within each step of the Innovator’s Method so that they can be studied more systematically in a larger sample of companies. We are also expanding the research sample to include firms whose IP performance decreased to further validate the correlations we report in this study. This process is much like the one that early researchers of the Toyota Production System went through to codify a set of practices that in some form or another comprised the production system used by Toyota to achieve cost and quality performance improvements over traditional mass production techniques. Once the set of practices were better understood, their rate of adoption within U.S. automaker plants could be studied as well as their interdependencies (Industrial and Labor Relations Review, Vol. 48, No. 2, 197-221). Of course, the innovation processes we have identified that allow firms to run fast and frugal experiments have much greater variety and will be more difficult to codify with precision. But the Innovator’s Method is a step towards greater understanding of management principles and techniques that are effective for solving high uncertainty problems—the kind that require innovation.